The City of London has no doubt the Bank of England will keep interest rates at 4.75%. A rise in annual inflation last month and a sharp rise in wages in the autumn mean its Monetary Policy Committee (MPC) is widely expected to hold off on cutting interest rates for the third time this year.
What many will find even more surprising is the wide disparity between the six committee members who voted for no change in rates and the three who voted for a rate cut.
Those who voted to take no action, including Governor Andrew Bailey; chief economist Huw Pill; and monetary policy director Clare Lombardelli, said the central bank’s mandate to keep inflation under its 2% target, or 10%, was at risk. Monthly wage growth jumped above 5%, and the inflation rate rose to 2.6% for three consecutive months.
They also worry about the long-term constraints on the labor market caused by illness and ill health, which appear to be preventing employers from getting the skilled workers they need and forcing them to pay higher wages — not just this year, but perhaps for many years to come.
If businesses can convince consumers they need to bear the pain of rising production costs, higher wages could fuel inflation over the next two years. Continued wage rises above inflation will also increase demand for goods on the high street, encouraging retailers to raise prices further.
On the other side of the debate are the dovish trio, who look to current wage and inflation figures to understand the state of the economy and how Labor will fare after its first budget.
They are concerned about the central bank’s assessment of fourth-quarter economic growth, which officials have cut from 0.3% to zero. This could be read as a rejection of Labour’s hopes that its budget would boost economic growth.
However, the ailing economy needs a boost somewhere, and that could come from lower borrowing costs. You might say this is the job of central banks.
There is also a view that recent wage increases are still related to the cost of living crisis and the efforts of workers to make up for the average price increase of more than 20% over three years.
At present, the increase in average wages is mainly due to the government’s continuous increase in the minimum wage. The NHS bonus is also reflected in pay figures and boosts average earnings – a factor that will be excluded in the new year.
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Second is the savings rate, which rose slightly last year, suggesting that many households are not spending the disposable income gained through higher wages but instead saving much of it.
Perhaps the uncertainty surrounding the budget influenced their thinking. Perhaps the threat of higher taxes, such as a 5% increase in council tax next April, is stopping consumers from opening their wallets.
Whatever the reason, unless someone is prepared to take decisive action, the forecast for zero growth in the fourth quarter of next year is likely to turn negative, with a recession looming.